When & How to Refinance Your Parent Plus Loans

What Is a Parent PLUS Loan?

A PLUS loan is a federal loan that graduate students, or parents of dependent undergraduate students, can borrow to pay for college or a career school. The U.S. Department of Education makes Direct PLUS Loans to eligible borrowers through schools participating in the Direct Loan Program. A Parent PLUS loan is one that parents take out to put their undergraduate child through school. This is a loan to the parent from the U.S. Department of Education. The borrower must have an acceptable credit history, and the amount available is the cost of attending the school (as determined by the school) less other financial aid the student receives. If the parent takes out a Parent PLUS loan, they are the responsible party, and the child has no obligation to repay it. At some point, parents may want to refinance Parent PLUS loans.

The reason most people want to refinance Parent PLUS loans is to get more favorable repayment terms, or the child may want to refinance the loan in their own name and take over repayment responsibility. Once their child is out of school, parents may look forward to paying off their house, saving more for retirement or just spending just a bit more on themselves for little luxuries. Refinancing, wherein the parents’ names or the child’s, can help decrease payments and free up money for other uses.

Interest Rates for Parent PLUS Loans

Congress sets the rate each year for Parent PLUS loans, and they tend to be high. However, to keep them from increasing too much, Congress has mandated that the ceiling for undergraduate loans is 8.25% and 10.5% for parent PLUS loans.  Your good credit won’t help you, because everyone gets the same rate.

In the 2016-2017 school year, the rate was 6.31% for Parent PLUS loans. That increased to 7% for the 2017-2018 school year. This means if parents took out a $10,000 PLUS rate for the 2017-2018 school year, they could expect to pay back $13,933, $423 more than they would have paid the previous year. However, from 2006 to 2013, the rate for Parent PLUS loans was 7.9%.  If you are borrowing Parent Plus loans in a time period when the rates are increasing every year, increases in the rates can add up to a significant additional burden over the course of a college education.

Parent PLUS Loans May Be Refinanced in the Parents’ Names

Parents may choose to refinance their PLUS loans, because if they have a good credit history, they are likely to qualify for much lower rates than the those they are paying. In fact, they could end up paying half the rate of a Parent PLUS loan or less. Variable rates, of course, are usually lower, but there can be very worthwhile savings with fixed rates also. Let’s say you have a loan balance of $40,000 at 7% interest. If you refinance at a new interest rate of 3% with a 10-year term, you can save $9,383 and lower your monthly payment by $78 per month.

Parent PLUS Loans May Be Refinanced in the Student’s Name

Parents are not permitted to transfer Parent PLUS loans directly to their child. Of course, once a child gets a job after graduation, they can pay the parents each month, but the parents remain legally responsible. However, a student can take over the loan and legally free their parents of responsibility by refinancing the Parent PLUS loans in their own name. The lender pays off the original government loan, so the parents are no longer liable. The child then gets a private loan from the lender. The child could consolidate all their student loans and include the parent PLUS loans, so they have just one payment. A side benefit is that if the child makes their installment payments on time, putting the loan in their name can help them build good credit.

This brings us to a hurdle. For a student to refinance Parent PLUS loans in their own name, they must have an acceptable credit history, an income, and an employment history. Of course, a parent could co-sign on the loan. Then the parent would still be responsible for paying it off, but so would the child.

The Downsides to Refinancing

Paying lower rates or shifting responsibility for repayment to their child are certainly strong incentives for parents to refinance Parent PLUS loans. However, there are some disadvantages you will want to weigh. When you refinance with a private lender, you lose some of the protection and flexibility of a federal Parent PLUS loan. Here are some benefits for which you could qualify with your Parent PLUS loan, but which would be lost if you refinance with a private loan.

Student Loan Forgiveness

Parent PLUS borrowers are not automatically eligible for the government’s Income-Contingent Repayment (ICR) plan, but that is not to say it isn’t possible. If you consolidate your loans through a government Direct Consolidation Loan, the amount you owe for your PLUS loan becomes eligible for ICR. Under an Income-Contingent Repayment plan, the amount of your payments is calculated in relation to your income. You can check what you could expect by using the government’s Repayment Calculator. After 25 years, any amount still unpaid will be forgiven, although the amount forgiven is taxable as income. You can apply for a direct consolidation loan at studentloans.gov. When you consult with your loan servicer, ask about an Income-Contingent Repayment plan.

As noted, this is a federal program. That means if you refinance your parent PLUS plan with a private lender, you are not eligible. Whether or not that matters to you depends on your income. If you have good credit and a good income, then you will be able to get low rates if you refinance your Parent PLUS loan with a private company and come out ahead. If you don’t qualify for low interest rates and are having a tough time making monthly payments, you may want to consider an Income-Contingent Repayment plan.

Payment Postponement

a.    Deferment

Deferment is when federal student loan payments may be put on pause temporarily, such as when you are in school or in the military if you qualify. Some private lenders may offer deferment also, but you must inquire. Under 20 USC § 1078- 2(d)(1)(A)(ii), parents may defer the repayment of a Parent PLUS Loan as long as their child is still enrolled as a student at least a half-time basis. That section refers to conditions to be met as outlined in section 20 USC § 1077 (a)(2)(C)(i)(I) or §1078 (b)(1)(M)(i)(I).

However, it doesn’t even have to be the student who is enrolled. The parent can get a deferment from a Parent PLUS loan even if the parent rather than the child is enrolled at least on a half-time basis. This eligibility lasts for six months after either the parent or the student is no longer enrolled, whichever occurs later.  Those who choose to defer payment of a Parent PLUS loan should be aware that interest does not stop accumulating, which could greatly increase the total amount paid. Therefore, unless you really need to defer the loan, it’s better not to.

b.    Forbearance

Forbearance is very similar to deferment, but the reasons are different. For example, if you lost your job and are finding it difficult to make payments due to financial hardship, you may be able to seek forbearance and have your loan put on hold. If you refinance your Parent PLUS loan, you will lose this protection. Though it’s possible you may be able to get forbearance from a private lender, but they don’t have to grant it.

Where to Refinance Parent PLUS Loans

Should you want to consider refinancing your federal Parent PLUS loans with a private lender, there are many available. We do not make recommendations, but here are a few (in alphabetical order) you could consider:

• LendKey
• SoFi
• Citizens Bank
• Common Bond
• Laurel Road
• Earnest
• Laurel Road
• Purefy
• Wells Fargo

To Refinance or Not to Refinance Your Parent PLUS Loans?

Whether or not it would be advantageous for you to refinance really depends upon your financial situation and your credit history. If you have the good credit and steady income that will qualify you for a good rate, then you may want to consider refinancing. Certainly, you should be able to lower your payments. Also, as we’ve already seen, it’s a way to transfer the debt to your child.

However, if your credit score has taken some hits, and you may need the flexibility and federal protections for paying back your Parent PLUS loan, then refinancing may not be for you. Unless you have a good credit score, you may not qualify or be able to get rates low enough for refinancing to be beneficial.